Sounds like complete bogus to me.
"Upgrade based on availability at check-in" has always meant a complimentary one-category upgrade (or in some cases a complimentary upgrade to the next available category; within reason) Sometimes the suites, multi-bedroom suites or speciality suites are excluded, but I've never een any restrictions regarding Deluxe rooms.
And her statement that "upgrades are never free" is complete nonsense, there are dozens of rates (AMEX FHR, Virtuoso, Ensemble, Signature etc.) which come with a free upgrade based on availability.